By: HUB’s EB Compliance Team

Each year employers set employer and employee contributions for their benefit plans. Most employers set contributions for the plan year and do not adjust them until the next plan year. However, occasionally employers may increase or decrease employee contributions during the plan year.

Why Make Changes

Most often when employers adjust contributions during the plan year, employee contributions increase. This decision can be driven by a number of factors, including changes in the employer’s financial condition, budget adjustments or economic outlook. Though less common, employers can decrease employee contributions during the plan year. This decision may be driven by a need to offer affordable coverage under the Affordable Care Act (“ACA”), or a need to become more competitive for talent.

Material Modifications and Reductions

ERISA requires that a Summary of Material Modifications (“SMM”) be issued when the plan makes a material modification. Whether a change is material depends on the specific facts and circumstances of the change itself. Employers should consult with counsel to determine if a change is material or not. Under the general rule, an SMM must be issued within 210 days after the end of the plan year in which the modification occurs. While this timing is generous, there are several instances where exceptions require notice to be provided sooner.

Additionally, the SMM must be sent sooner if there is a material reduction in covered services or benefits. Under the regulations, a material reduction in covered services or benefits is any change to the summary plan description that, either by itself or with other changes made around the same time, “would be considered by the average plan participant to be an important reduction in covered services or benefits under the plan.” Examples of such reductions include, eliminating benefits payable under the plan; reducing benefits payable under the plan; and increasing premiums, deductibles, coinsurance, copayments, or other amounts to be paid by a participant or beneficiary. In these cases, an SMM needs to be issued no later than 60 days after the change, which is much sooner than the typical SMM deadline described above.

The ACA requires 60 days advance notice of any changes that impact the Summary of Benefits and Coverage (“SBC”). The SBC provides very specific information, so it is clear whether a plan modification would cause changes to the SBC. Examples of information included in the SBC are deductibles, out of pocket limits, and copays.

Cafeteria Plan Rules

When employees pay their portion of premiums on a pre-tax basis, the cafeteria plan rules apply. Under these rules, participant elections are irrevocable (i.e. unable to be changed) during the plan year unless the individual experiences a qualifying event as defined by the cafeteria plan regulations and included in the plan. Common qualifying events include losing other coverage, birth or adoption, and getting married.

Cafeteria plans may also allow changes to elections based on significant cost changes, which can be increases or decreases. The cafeteria plan and the underlying benefit (e.g., medical) plan must allow for the change. The specific changes allowed by this event depend on whether the employee’s cost increases or decreases. If the cost significantly decreases, employees who previously waived coverage may now enroll. If the cost significantly increases, employees currently enrolled may now either drop coverage or move to a less expensive plan option. This is not available for health FSAs.

Whether the cost changes are significant depends on the facts and circumstances of the situation. There is no specific dollar amount or percentage change that qualifies a change as significant. Employers should consider their entire populations when determining whether a change is significant. For example, a $20 per month increase in premiums is more likely be significant for a lower earning employee as compared to a higher earning employee. Employers may also use their past increases to guide in this determination. For example, if an employer typically increases employee contributions 3-5% at open enrollment, a 15% mid-plan year increase would be significant.

If the cost changes are not significant, the cafeteria plan language may allow for automatic election changes. This language would benefit the employer rather than employees as it would allow existing elections made by employees to automatically change. For example, if an employer’s plan included this language and increased employee premiums for dental coverage by $0.75 per month, the employer could make this change without obtaining new elections from employees. Just as with significant cost changes, insignificant changes are determined based on the facts and circumstances of the situation.

Practical Considerations

Before changing contributions employers should consider the timing of any changes as well as employee perception. If an employer just increased employee contributions at the start of their plan year, another increase shortly thereafter is likely to be perceived poorly by employees. Likewise, if a plan year starts in January, increasing contributions in October likely won’t sit well with employees. If there is an opportune time to increase premiums, it may be the middle of the plan year; far enough into the plan year so the taste of increases at the previous renewal aren’t so fresh, but far enough from the next plan year, so the prospect of additional increase is not so soon on the horizon.

Even though the regulations allow for notice after a change in premiums, employers should provide advance notice to employees. Providing advance notice is both a courtesy to employees, and likely helps the reduce the number of questions from employees. Not providing advance notice may also conflict with state payroll laws which often require employees to consent to certain deductions from their pay.

Looking Ahead

Employers considering changing contributions during their plan years may do so. However, they need to understand that these changes may allow employees to change their plan elections, if allowed under the cafeteria plan rules and their applicable plan documents. They will also need to consider the impact on ACA affordability and comply with applicable notice requirements. Increases in contributions may also be viewed negatively by employees.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.